Staffing your church for the long-term with the best personnel is key to the growth and stability of your congregation.
Churches are commonly tight on money and seldom see themselves as competing financially with other churches when seeking new staff members. In many cases both the church and those they are seeking to hire sense a higher purpose—a calling—in the employment relationship, and this can mean that both parties fail to recognize the importance of fair and adequate compensation and benefits.
Almost every church struggles to raise funds for ministry, support a staff and maintain its property. In seeking to be as responsible with its resources as possible, the question is often asked, “Why should we provide benefits, should our employees not be responsible to take care of these matters themselves?”
Our tax code gives significant breaks for certain benefits when they are paid for or provided through an employer-sponsored benefit plan. This means that our tax code, and to some extent the market place of providers, is built on the premise that individuals receive these benefits through their employer rather than purchasing them privately.
Benefits do not come cheap, but a well-structured and generous benefits policy will pay rewards in a staff that feels secure, is focused on your ministry and is willing to serve for the long-term.
There are six general categories of benefits:
A church should offer all six to protect the institution in case the unexpected occurs. You also want to protect ordained staff so that they can fulfill their ministry knowing that they and their family will be cared for.
You can learn more about plan benefits through Our Services & Plans.
Shopping For Benefits
Once you have decided what benefits to offer, the next step is searching out options. Churches that are part of a denomination may have a denominational benefits plan that can provide for most or all of the benefits you choose to offer. Sometimes these benefits are offered as a package. Savings can be substantial when you purchase the package compared to shopping for each benefit separately from multiple providers.
When shopping for benefits, you also need to consider the complexity that managing the benefits will add to your church staff or lay committees. How many vendors do you want to work with? Will you have a single point of contact or will a retirement plan require you to engage a Third-Party-Administrator to manage the plan and a separate company to provide and manage the investments. How complex is the process of enrolling and terminating employees in the plan?
A plan may offer excellent benefits at an affordable price on the face of it, but if it requires you to add the equivalent of a half-time position to manage the benefits, you may be better off paying a little more to a provider that offers more management and depth of customer service.
Preparing for retirement is or should be the primary financial goal of every adult from the time they receive their first paycheck. Your goal as an employer is to help your employees get on the path toward a secure retirement. A well-structured retirement plan can prevent the unfortunate scenario of employees working well beyond their desired retirement age—when you both wish they were doing something else.
The tax treatment of all tax-deferred savings vehicles, like 401(k)s, 403(b)s and traditional IRAs is similar. Amounts contributed today are excluded from current taxable income. Taxes on the invested amount, along with any investment growth, are deferred until the accounts are withdrawn during retirement years.
Once you have decided to offer a retirement savings plan, usually a 403(b) plan for most churches, you will have decisions to make about how you will structure it. Will the church make a contribution based on a percentage of each employee’s salary? Will you use a matching plan to encourage your employees to save? There are innumerable ways that you can structure a plan and a good plan administrator can help you structure a plan to meet your specific objectives.
|Comparing Contribution Limits|
|403(b) vs. Traditional IRA|
|Maximum Individual Contribution||Catch-up Contributions Age 50+||Total Allowable Contributions Including Employer Contributions2|
|Traditional IRA 1||$5000||$1000|
1 The ability to deduct IRA contributions from current income is subject to income limitations.
2 Maximum allowable contributions are subject to taxable income limits.
As the table illustrates, the maximum contribution for workers who are under age 50 is $5,000 for Traditional IRA contributions, but $17,000 for employer sponsored plans. The preference for employer provided plans extends to the catch-up provision where the additional amount that workers age 50+ can contribute to an IRA is only $1,000, while the catch-up for employer provided plans is $5,500. That means an employee could contribute almost four times as much to an employer plan as they could to a personal Traditional IRA, and that is not even counting the generous provisions that allow for up to $50,000 in total contributions if the employer is making contributions as well.
No church wants to endure the pain of planning for the funeral of one of its own staff. Imagine how that pain would be multiplied if you discovered that the financial resources left for the survivors were completely inadequate. Offering a basic life insurance plan can provide the foundation for protection against economic catastrophe.
An employer can provide up to $50,000 worth of life insurance benefit to an employee without tax consequences to the employee. The value of church-paid life insurance in amounts over $50,000 does have to be reported as taxable income. Most employer-provided insurance is offered as group term life insurance. When purchased through a group plan, the premium is almost always cheaper than an individual can secure through private policy. Group term life insurance is usually the most inexpensive. However, the value of employer-paid life insurance in amounts over $50,000 does have to be reported as taxable income to the employee.
For more on MMBB’s term life insurance available through our Comprehensive Plan, click here.
One of the most tragic situations is when a pastor or staff person becomes unable to work due to disability. Only rarely is disability a catastrophic episode where an employee goes from being healthy and productive one day to unable to work the next. The more common scenario is a gradual diminishing of work capacity due to a worsening chronic illness or the onset of a debilitating disease.
The period during which the staff person loses the ability to function at full capacity is usually accompanied by gracious support of the church and a prayerful hope that things will get better. When it becomes apparent that things will not get better, employees and churches have to make difficult decisions that have profound personal impact on all parties involved.
A disability policy protects the church as much as it does the employee. A disability policy protects the church by allowing it to know that it has provided for the ongoing support of a beloved employee while allowing it to move on in ministry.
Unfortunately, in both the church and secular world, life insurance is offered at a greater rate than disability insurance, yet industry statistics have made clear for years that the likelihood of a worker being disabled at some point during their working years is significantly higher than the likelihood of them dying.
Employer paid premiums on disability policies are not a taxable benefit for employees. The employee only pays taxes from income received from the disability policy after they are disabled. As with employer sponsored life insurance plans, group disability plans are usually cheaper than buying an individual policy.
For more on MMBB’s disability insurance available through our Comprehensive Plan, click here.
Under current law, health insurance benefits paid for by an employer are not reported as taxable income to an employee. If the employee pays for their own insurance through a private plan, the premium is paid for with after-tax dollars. In other words, not only is the employee paying for their own insurance, they pay taxes on the money used to purchase health coverage. This makes employer-paid coverage doubly attractive to your staff.
In addition, for most employees, group health insurance often costs less than a private policy where rates may be established using underwriting criteria that take the specific health history of an individual into account. While the new health reform law prohibits excluding someone because of a pre-existing condition, chronic health problems can result in higher individual premiums than group plans.
For information on the Affordable Care Act, click here.
While technically not a form of compensation, a Flexible Spending Account lets your church offer tax savings to employees who must pay for health and dependent care expenses.
Each year, employees elect how much to set aside from their paychecks for the coming year, subject to IRS limits. The withheld funds are not reported as taxable income for federal income tax or Social Security/Medicare tax. In most states, FSA contributions are not reported for state income tax purposes either. When an employee incurs an eligible expense, he or she submits documentation to the employer and is reimbursed with tax-free funds.
Your church can set up FSAs for health care, dependent care, or both.
Under IRS rules, unspent FSA funds cannot be carried over from year to year. Any funds not used to reimburse claims by the end of the following year’s 2½ month1 grace period are forfeited and returned to the employer. That said, employees with even a modest level of predictable health care or dependent care spending can save a significant percentage by paying for it with pre-tax dollars.
For more information on Flexible Spending Accounts, click here.
Most compensation packages typically specify how much paid leave a minister can take. Since this doesn’t increase or reduce the pastor’s salary, the dollar value is generally not stated. Still, you can increase or reduce this part of the compensation package as part of your negotiations.